LYNN BERGMAN: IMPROVING NORTH DAKOTA’S “LESS THAN PERFECT” CREDIT RATING
Barron’s August 29, 2011 edition, titled “Good, Bad, and Ugly” by Jonathon R. Laing is referenced. It can be read on the web at:
Standard & Poor’s rating of North Dakota is AA+, the same as their credit rating of the United States (which was downgraded from AAA to AA+ on August 5th, 2011 for the first time since granting its AAA rating in 1917). North Dakota’s AA+ credit rating is not an economic parameter that North Dakota politicians brag about during re-election campaigns, nor should it be.
A summary of the credit ratings of the states is shown below:
AAA
Delaware, Florida, Georgia, Indiana, Iowa, Maryland, Minnesota, Missouri, North Carolina, Utah, Virginia, Wyoming.
Average of 12 states:
Federal Spending As a Percent of State GDP = 236/12 = 19.7%
Medicaid As a Percent of Outlays = 252/12 = 21.0%
Percent Change in Tax Receipts = 101.5/12 = 8.46%
Tax Backed Debt as a Percent of State GDP = 40.75/12 = 3.40%
Funded Percent of State Pensions = 986/12 = 82.2%
Troubled Mortgages = 84.8/12 = 7.07%
June Unemployment Rate = 94.5/12 = 7.88%
AA+
Alaska, Idaho, Kansas, Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Texas, Vermont, Washington.
Average of 15 states:
Federal Spending As a Percent of State GDP = 321.8/15 = 21.5%
Medicaid As a Percent of Outlays = 283/15 = 18.9%
Percent Change in Tax Receipts = 212.9/15 = 14.2%
Tax Backed Debt as a Percent of State GDP = 58.58/15 = 3.91%
Funded Percent of State Pensions = 1160/15 = 77.3%
Troubled Mortgages = 76.9/15 = 5.13%
June Unemployment Rate = 109.1/15 = 7.27%
AA
Alabama, Arkansas, Colorado, Connecticut, Hawaii, Louisiana, Maine, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New York, Pennsylvania, Rhode Island, West Virginia, Wisconsin.
Average of 17 states:
Federal Spending As a Percent of State GDP = 489.7/17 = 28.8%
Medicaid As a Percent of Outlays = 346/17 = 20.4%
Percent Change in Tax Receipts = 118.5/17 = 6.97%
Tax Backed Debt as a Percent of State GDP = 95.25/17 = 5.60%
Funded Percent of State Pensions = 1221/17 = 71.8%
Troubled Mortgages = 120/17 = 7.06%
June Unemployment Rate = 142.4/17 = 8.38%
AA-
Arizona, Kentucky, Michigan, New Jersey
Average of 4 states:
Federal Spending As a Percent of State GDP = 92.1/4 = 23.0%
Medicaid As a Percent of Outlays = 96/4 = 24%
Percent Change in Tax Receipts = 48.1/4 = 12.0%
Tax Backed Debt as a Percent of State GDP = 20.44/4 = 5.11%
Funded Percent of State Pensions = 281/4 = 70.3%
Troubled Mortgages = 34.7/4 = 8.68%
June Unemployment Rate = 38.9/4 = 9.73%
A+
Illinois
Federal Spending As a Percent of State GDP = 15.9%
Medicaid As a Percent of Outlays = 33.0%
Percent Change in Tax Receipts = 13.7%
Tax Backed Debt as a Percent of State GDP = 3.97%
Funded Percent of State Pensions = 51%
Troubled Mortgages = 10.5%
June Unemployment Rate = 9.20%
A-
California
Federal Spending As a Percent of State GDP = 16.2%
Medicaid As a Percent of Outlays = 22.0%
Percent Change in Tax Receipts = 5.70%
Tax Backed Debt as a Percent of State GDP = 5.08%
Funded Percent of State Pensions = 81%
Troubled Mortgages = 8.80%
June Unemployment Rate = 11.8%
Summary Narrative
Metaphors are sometimes the most accurate way to explain these things. So let’s compare an individual’s credit rating with a state’s credit rating. But first, let’s study a Summary Table and Summary Graph that highlight the factors that affect a state’s credit rating:
Summary Table (all numbers are percents)
Summary Chart
Number One Factor - Employment
The most important factor in receiving a good personal credit rating is a permanent job!
And the most important factor influencing a state’s credit rating is its Employment Rate. By far the most influential factor in North Dakota’s relatively good credit rating is its 96.8% Employment Rate. Proof of this fact can be found by examining the correlation factor (R2 = 0.7837 on the Chart) of 78.37% for employment. A correlation of 95% or better may be safely used to project the future.
Number Two Factor – Tax Backed Debt
The second most important factor in receiving a good personal credit rating is a low enough “debt to income” ratio to allow one to pay bills on time. When I sought my first home loan 40 years ago, a loan up to 25% of one’s income was the norm.
A state borrows using future tax revenues as collateral. If a state is over extended, its credit rating can suffer. The correlation factor (R2 = 0.2489 on the Chart) of 24.89% is only about one-third the magnitude of that for employment. This is an area where North Dakota can directly affect its future by reducing its debt. It is not surprising that North Dakota’s tax backed debt of 4.26% of state GDP is closest to the average debt of Illinois, arguably the most corrupt state in the union. Ten years of leadership from a governor with a “rich” banking heritage has resulted in North Dakota’s credit excesses. It is probably safe to say that, if North Dakota’s tax backed debt were closer to the 3.4% average of all states with a AAA credit rating, North Dakota would have a AAA rating to make it a “bakers dozen” (13 states) in that category instead of 12 states.
Number Three Factor – Federal spending as a percent of state GDP
In order to pay one’s bills on time, an individual must budget to prevent over spending. Dependence on others (i.e. an uncle) for necessities (food, clothing, shelter) makes an individual vulnerable in the event that the source of supplemental funding dries up.
North Dakota receives 23.5% of its GDP in federal resources, falling closest, in this category, to the average of the four states (Arizona, Kentucky, Michigan and New Jersey) with a AA- credit rating. Arizona has suffered greatly from the housing bubble, Michigan from the economic woes of the U.S. auto industry, and New Jersey was its own worst enemy, having passed a sales tax increase immediately prior to the onset of the “great recession”. To prevent this vulnerability, North Dakota must begin to understand that federal funding too often comes with long term state obligations that are untenable. State elected officials and legislators can learn from Burleigh County commissioners who found the courage to turn down stimulus funding…preventing severe long term maintenance costs that would have arisen from such funding.
Number Four Factor – Funded Percent of State Pensions
When an individual agrees to a contract with an employer, the viability of the employer’s business is important to consider.
Likewise, the ability of a state to fulfill its lawful obligations is important. While North Dakota funds its state pensions programs at 81%, it can learn from the states of Delaware (94%), North Carolina (97%), Washington (99%), New York (101%), and Wisconsin (100%). Sadly, North Dakota seems intent to emulate California’s 81% funding of state pensions…stuck in the “Defined Benefits” rut when many states have already switched to the “Defined Contributions” plans so prevalent in the private sector.
What must be done to raise our credit rating from AA+ to AAA?
North Dakota’s booming oil and gas industry is largely responsible for our credit rating being relatively high by providing for our great state the equivalent of “full employment”.
Action by legislators and our governor are necessary in the near future to reduce North Dakota’s tax backed debt, to decline federal funds in new areas and even reject federal funds in historically federally funded areas, and to change state pension plans from “defined benefits” to “defined contributions”. These actions will require courage and commitment to the well being of future generations of North Dakotans…but the reward will be a AAA credit rating and a state government to be proud of.
Today, all North Dakotans can be proud of our work ethic. But “courage” will be required of our elected officials to make us proud of THEM! Our future must employ the equation of life…Love = Work + Courage.
DakotaBeacon